As the multisite and church planting movements continue to become the fastest form of multiplication and community impact, an increasing number of churches are looking to facilities they would lease rather than own. Given this trend, here are some insights and tips on negotiating a lease.
A few years ago, INC Magazine released an article on how to negotiate a good deal on a lease. While the article’s approach was slightly more mercenary than most churches would take (I said most, not all), the concepts are solid and can prove to benefit a church or other ministry when considering leasing versus buying.
I have incorporated some of the concepts that they encouraged their readers to implement and modified them to be more “church” related.
1. Set terms; get free rent
Your first order of business is to negotiate the term, or duration, of the lease and the rent you will pay, which is usually figured per square foot. Leases typically include an option to renew at the end of the term, at either a specified rental rate or “prevailing market conditions.”
Small-business advisers generally recommend the shortest term possible. The advantages of a short-term lease are clear: Your church won’t be trapped in a space if things don’t go well or go so well that the church needs more space. The disadvantage is that landlords are less likely to grant concessions to tenants that won’t promise to stay for, say, five years.
2. Count the costs and the square footage
Commercial properties are generally valued according to the square-foot rental rates in lease contracts. As a result, landlords like to hold firm on the contracted monthly rates, even while they offer rebates off the monthly rent. Of course, as far as you are concerned, a deal is a deal, no matter its structure—at least in the short term.
Measure the space before you sign a lease. Spaces have sometimes been reconfigured three or four times, and often they’re going off an old floor plan that’s not accurate. Also, determine if there is some common area that is not within your lease space that you are paying for, in addition to the actual usable space.
3. Mind the extras
Landlords tend to pass on expenses to their tenants, one way or another. In a triple net, or NNN lease, the landlord bills separately for taxes (something a church has to pay the landlord since the landlord is not tax exempt), insurance, and operating expenses or common area maintenance (CAM). In a multi-tenant complex, expenses are prorated among tenants according to their share of the total space. CAM is usually broadly defined; besides upkeep for shared facilities such as the parking lot, lobby, stairwells, and restrooms, it can also include virtually any operating expense.
Be aware of which expenses your landlord proposes to bill, particularly as part of CAM. Utilities are also borne by the tenants. In shopping centers, tenants are metered individually; in most office buildings, utility costs are apportioned by square footage.
A gross lease, by contrast, includes everything, at least in theory. This term, too, means different things to different people. For instance, to some brokers, a full-service lease is synonymous with a gross lease; others say full service includes utilities but gross does not. And gross leases will usually pass on annual increases in expenses. Either way, make certain that your expenses won’t increase within the first twelve months of your occupancy.
Most landlords attempt to hold tenants responsible for maintenance and repairs of anything other than the roof, exterior walls, and parking lots. Some require renters to replace failing equipment, including the heating, ventilation, and air conditioning systems, a potentially enormous outlay. If the building is approaching ten years old, or the HVAC systems have seen inordinate use, get the HVAC systems inspected, along with the plumbing and electrical equipment. If you find problems, make it a point of negotiation.
4. Plan an escape clause and other provisions
Leases almost always favor the landlord. But you can build in clauses that level the playing field. Be strategic in setting priorities. Don’t try to make wholesale changes as they will most likely turn the negotiations in the wrong direction and sour the deal. Be more concerned with making four or five important changes than 20+ small changes.
Co-tenancy: Many shopping centers and office/warehouse complexes rely on big anchor stores to draw traffic. So what happens to the smaller tenants when an anchor closes its doors? A co-tenancy clause lets a renter escape the lease if the landlord doesn’t replace the anchor in a specified period.
Personal guaranty: Many landlords will insist on a personal guaranty from the tenant. We recommend that you make every effort to avoid this. Consider other options, but do not put the lead pastor, elders, deacons, trustees or board at personal risk, if at all possible.
Sublease: A sublease allows a tenant to sublet space to another organization. A sublease allows you to turn your fixed costs into variable costs, especially if you need to vacate all or part of the space.
5. Of brokers, beware
You may have recruited your broker, but your broker isn’t necessarily working for you. He is working for the landlord who pays the commission—in most markets from five to six percent of the total lease value, split between the landlord’s listing agent and the broker who introduced you to the property. Here are other things to keep in mind about brokers:
Listen to your lawyer. A good real estate lawyer who really does work for you can recommend brokers who will advise you in good faith.
Trust but verify. Be careful to not lean too heavily on your broker when it comes time to negotiate. Many brokers will do whatever it takes to get the deal signed and don’t want to add complexity. All contract details should cross your lawyer’s desk.
Don’t go it alone. Negotiating on your own behalf won’t put extra money in your pocket. The share of the commission that would have gone to your broker will just go to the listing agent. And you could miss opportunities for concessions.